Sterling Slips as Middle East Tensions and Hot US Inflation Boost Dollar

The British pound fell to $1.33 as investors turned to the dollar for safety, spurred by escalating Middle East conflicts and stronger-than-anticipated US PPI data ahead of critical central bank decisions. On Wednesday, Israel’s strikes on Iran’s Asaluyeh refinery and the South Pars gas field, coupled with evacuation warnings from Iran’s Revolutionary Guard for oil sites in Saudi Arabia, the UAE, and Qatar, intensified geopolitical uncertainty. Compounding the pressure, US producer prices soared 0.7% in February, more than double the 0.3% forecast, while the annual rate reached a one-year peak of 3.4%. Attention now shifts to the Bank of England and Federal Reserve meetings, where rates are widely expected to remain unchanged. For the UK, analysts will closely watch the Monetary Policy Committee’s vote split, with a 7-2 or 6-3 decision to hold rates seen as the most probable outcome.

The British pound steadied above $1.33, seeking to recover from a recent steep decline that pushed sterling to a three-month low. Market attention remains fixed on escalating Middle East tensions and their potential influence on the Bank of England’s policy stance, as the central bank prepares for its upcoming decision this week. US President Donald Trump suggested that military operations in Iran would extend beyond this week, while Israeli officials warned on Monday that the conflict could drag on for “several more long weeks.” The resulting surge in energy prices has led traders to assign a roughly 50% probability to a Bank of England interest rate hike in November, a notable shift from early March, when markets anticipated two rate cuts this year. For this week’s meeting, analysts will scrutinize the vote split among policymakers, with expectations centered on a 7-2 or 6-3 decision to maintain current rates.

The British pound traded just above $1.32, attempting to rebound from a recent sharp slide that sent sterling to its weakest level in three months. Investors are closely monitoring ongoing tensions in the Middle East and the potential impact on the Bank of England’s policy outlook ahead of this week’s decision. Israeli officials warned the war could last “several more long weeks,” while US President Donald Trump said Iran is “not ready” to reach a deal. The spike in energy prices has prompted traders to adjust their expectations for interest rates, with markets now pricing in roughly 23 basis points of a hike for December, just shy of a quarter-point increase. This marks a sharp reversal from early March, when investors were expecting the BOE to cut rates twice this year. For the March meeting, attention will focus on the vote split, with a 7-2 or 6-3 decision to hold rates seen as the most likely outcome.